Citigroup's troubles will not sleep

By Richard Beales, breakingviews.com

9:03AM GMT 21 Nov 2008

The US banking giant’s shares took another bath on Thursday, with big rivals Bank of America and JPMorgan not far behind. The lack of specific bad news isn’t soothing investors. They’re worried about economic gloom, more losses and the uncertain outlook.

At least on Thursday, fear was circling these institutions more ominously than it was former investment banks Goldman Sachs and Morgan Stanley. That may be because commercial property, consumer debt and corporate lending – fortes of the universal banks – all look vulnerable as the picture painted by economic indicators gets darker.

One problem is that the banks’ recent financial history doesn’t really help as a guide to the future. The credit losses which already have unfolded exceed almost all expectations. Even supposing mortgage losses, for instance, are fully taken into account, investors worry that write-downs on other types of assets could follow, in equally unexpected doses. That makes the information value of the banks’ balance sheets pretty low.

Another is that the earnings power of financial firms in a post-crisis era when less leverage is available and markets are less predictable is anybody’s guess. So, that renders valuations based on earnings as untrustworthy as those based on assets. And finally, investors are increasingly sceptical of turnaround plans involving asset sales or capital raising.

So what’s the endgame? It’s unlikely to be collapse for Citi or its big rivals. Despite dwindling market capitalisations – Citi’s is now less than $30bn – they remain too big to fail. But additional infusions of cash from the US government also could hurt shareholders by diluting them, potentially to zero. That’s putting once unthinkable options onto the table: Citi is reportedly weighing an outright sale of the whole group.

There may be other recovery scenarios, but precious few investors have the nerve to bet on them. It’s all about safe, relatively predictable investments that won’t lose any more money. That may, perhaps, be a particularly acute feeling as an exhausting 2008 winds down – the end of the reporting year for most market players.

No wonder Citi boss Vikram Pandit is trying to get the US ban on short-selling financial stocks reinstated. It’s a futile move, but as Pandit struggles to stabilise the group, he may think investors will lose confidence in him if he isn’t seen to be trying something. In any case, the bank that never sleeps may not get any respite for a while.